Hongkong Land - DBS Research 2017-03-03: A bargain

Hongkong Land - DBS Vickers 2017-03-03: A bargain HONGKONG LAND HOLDINGS LIMITED H78.SI

Hongkong Land - A bargain

  • FY16 underlying profit fell 6%, 7% lower than our estimate with weaker-than-expected residential earnings as the main culprit.
  • Vacancy for Central portfolio improved to 2.2% with higher rents achieved on renewal or new letting. 
  • The expected encouraging result of upcoming tender of Murray Road car-park building site should boost the stock sentiment.
  • BUY with US$7.90 TP.

What’s New 

  • Hongkong Land's FY16 underlying profit fell by 6% to US$848m, 7% below our forecast primarily due to lower-than-expected residential sales earnings. Final DPS remained flat at US$0.13, taking the full-year DPS to US$0.19 Gross rental receipts were 1% higher at US$859m reflecting primarily positive office rental reversion aided by tight vacancy & limited supply in Central which led to a 2% y-o-y growth in average office rents to HK$103psf in 2016.
  • Vacancy of its Central office portfolio improved to 2.2% in December 2016 from June 2016’s 3.1%. Retail portfolio remained fully occupied but lower turnover rents resulted in average retail rents falling 1% to HK$218psf in 2016.
  • Its Singapore office portfolio was virtually fully leased in December 2016. However, reversionary growth has turned negative, resulting in average rents falling to S$9.3 psf in 2016 from S$9.5psf in 2015.
  • WF Central in Beijing is scheduled to open in 2H17. This retail-led development contains a 74-room Mandarin Oriental Hotel which is scheduled to open in 2018.
  • Exchange Square, a mixed use development in Phnom Penh, has been completed recently and is in the process of being handed over to tenants. Contributions from new investment properties should further enhance the company’s rental income stream.
  • Residential property business recorded lower profit contributions as its FY15 results were boosted by a gain of US$63m arising from the reclassification of a trading property to investment property In 2016, Hongkong Land's attributable contracted sales in China reached US$1,105m, up 38% y-o-y. As of December 2016, the company's net order book in China stood at US$1,083m. Over time, China residential sales should become increasingly vital to Hongkong Land's earnings as a result of higher completion.
  • In December 2016, Hongkong Land won the tender to develop a residential site on Margaret Drive in Singapore (GFA: 238,900sf). Hongkong Land beat 13 other developers, paying SG$238.4m (SG$998psf). The project is expected to be completed in 2020. After completing J Gateway in 2016, Hongkong Land is scheduled to complete one wholly owned project in Singapore each year from 2017 to 2020. The LakeVille development, scheduled for completion in 2017, has almost been fully pre-sold. Overall, development profits in Singapore is expected to be lower in FY17, offsetting the increase in residential sales contributions from China.
  • In December 2016, Hongkong Land’s net debt improved to US$2bn from June 2016's US$2.3bn. This translated into a comfortable gearing of 6%. The company is financially sound for making acquisitions to drive long-term growth.
  • The stock is trading at a 38% discount to our assessed current NAV. Office leasing demand from Chinese enterprises in Central continues to be strong while new office supply remains tight for the years ahead. The favourable supply/demand dynamics should continue to lend strong support to Central office rents, which should outperform those in decentralised areas. The Murray Road multi-storey car park building site will be offered for tender soon. This should attract tremendous interest from not only developers but also Mainland financial institutions. The encouraging tender results expected could prompt the revaluation of office assets in Central, which should in turn be positive to Hongkong Land. 
  • BUY with US$7.90 TP, based on a 35% discount to our December 2017 NAV estimate.

Jeff YAU CFA DBS Vickers | Andrew Robert LAM DBS Vickers | http://www.dbsvickers.com/ 2017-03-03
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 7.90 Up 7.760